Has economic uncertainty in the U.S. increased?
Two indexes based on a method developed by Scott R. Baker, Nick Bloom, and Steven J. Davis indicate a significant uptick in economic uncertainty. These indexes combine three sources of data: “the frequency of newspaper articles that reference economic uncertainty and the role of policy; the number of federal tax code provisions that are set to expire in coming years; and the extent of disagreement among economic forecasters about future inflation and future government spending on goods and services.”
But the Volatility Index from the Chicago Board Options Exchange as well as the Federal Reserve Bank of Atlanta’s Survey of Business Uncertainty point to the opposite direction:
Economic Uncertainty in the US Economy
By: Timothy Taylor – Journal of Economic Perspectives
The impact of trade policy uncertainty on the U.S. economy
This paper by Céline Poilly and Fabien Tripier explores the impact of trade policy uncertainty on U.S. states, focusing on how regional economies are affected by changes in import tariffs. The authors develop a novel measure of regional trade policy uncertainty by analyzing the volatility of national import tariffs at the sectoral level. They use a stochastic volatility model to estimate the time-varying volatility of sectoral tariffs, similar to methods used for domestic taxes.
- Empirical analysis: The authors conduct a panel estimation to quantify the effects of trade policy uncertainty on U.S. state economic indicators, such as employment and GDP growth.
- Theoretical modeling: They develop a two-region open-economy model to investigate the mechanisms through which trade policy uncertainty affects regional economic activity. The model includes both domestic and international trade interactions.
Findings:
- Economic impact: The study finds that states with higher exposure to trade policy uncertainty experience significant declines in economic activity, measured by real output and employment. This is attributed to precautionary behavior by firms and households in response to increased uncertainty.
- Transmission channels: The authors identify two main transmission channels for the effects of trade policy uncertainty:
– Precautionary behavior: Firms face uncertainty about future costs, while households adopt precautionary saving, leading to reduced aggregate demand and economic activity.
– International trade feedback: Reduced demand for foreign goods affects trade-exposed regions, creating an international feedback effect that amplifies the recessionary impact.
- Model validation: The theoretical model successfully replicates the empirical findings, showing that higher exposure to trade policy uncertainty leads to economic downturns in trade-exposed regions.
Regional Trade Policy Uncertainty
Authors: Céline Poilly, Fabien Tripier
From: Aix-Marseille Université, Université Paris Dauphine
